It’s no secret that small businesses face many challenges—even more so in the past two years. Those challenges often either cause financial difficulties or are the result of financial difficulties. And that can lead to bad credit scores (which can cause even more financial problems, including challenges for potential borrowers). Your business credit score is completely separate from your personal credit score, and neither score influences the other. However, if you’re a new business owner or in a start-up, your personal score may be used to help you qualify for a start-up loan.
A bad credit score for a business is considered any FICO score below 670. Financial items that contribute to a lower FICO score include collections, liens, judgments, or bankruptcies for the business, and how much those collections are for. Other things that contribute to a bad credit score are poor payment history or a business that’s showing increasingly slow payments on their loans, and frequent credit inquiries.
Then there are aspects less related to finances that are considered in a credit score. Credit score requirements like how long the business has been operating, the type of business, and the size of the business. Once your business’ credit score drops below 670, you’ll have a harder time getting a business loan. A low credit score under 530 means you’re unlikely to qualify for a loan, even a bad credit business loan.
But your FICO score isn't the only number that impacts loan applications. There's also your official business credit score. This is a score between 0 and 100, and just like the FICO score, the higher, the better. Many companies use both to assess creditworthiness. But whatever your FICO score and business credit score are, there are options for financing. Let’s look them over and see what may be right for your business.
Even if you think you have a good credit score, it's important that you check your business' credit report. Your loan repayment terms (and even your ability to qualify for a loan in the first place) is directly related to your credit report.
You can request your business credit report from companies like Dun and Bradstreet, Experian, or Equifax. When you receive the credit bureau report, look it over carefully and make sure it's completely accurate. Mistakes do happen, and mistakes on your credit report will have a negative impact on your ability to secure business financing. The company that provided the report will include an option to report any information that is inaccurate. Provide as much proof as possible to support your claim.
Once any inaccuracies on your credit report have been resolved, order a new report to make sure that the report has been updated. It does not impact your credit for you, the business owner, to order another credit report. But if you have multiple lenders pulling hard credit reports, this will have a negative impact.
Note: A soft credit check is a little different. It pulls basic information like your business credit score, but does not get logged as a credit check. Having a soft credit check done will not impact your credit score.
While your credit score is one of the most important qualifying things that lenders who offer small business loans are looking for, there are other things that they consider. They want businesses that can show positive cash flow, have steady revenue, and can offer collateral to secure a loan. A traditional lender, like an established bank, will have stricter requirements than an online lender.
Some lenders offer a variety of loans. Others will stick to specific types of loans. Small business loans and financing fall into these categories:
- Business line of credit: You have access to a set credit limit. Payments are based on the amount owing at the end of each payment cycle.
- Invoice financing/Invoice factoring: Each of these options involves financing based on an invoice or set of invoices. The lender provides prompt payment of a portion of an invoice in exchange for a fee and takes on any collection action if there is nonpayment.
- Term loans: A lump sum received from a lender. Payments are set out in a schedule.
- Equipment loan:A A loan for specific equipment financing. The equipment is collateral for the loan itself.
- Business credit card: A credit card exclusively for business purchases.
- Merchant cash advance: An advance paid against future credit card sales and debit card transactions. Payment is a portion of the daily receipts for these transactions.
- SBA loan: A loan backed by the small business administration
- Working capital loan: A loan for covering the costs of everyday operations.
- Startup loan: Financing for a startup business
There’s one more financing option that may be the best fit for small businesses with bad credit or a business that wants a cash flow solution without a credit check. It’s called digital net terms. For every customer that a B2B organization works with, there’s an associated invoice with net terms of 30, 60, or 90 days.
While this type of arrangement is ideal for the customer, it can leave a business struggling with cash flow, working capital, and their own accounts payable while they wait for payment. Digital net terms (or net-terms-as-a-service) provide discreet credit checks on businesses prior to a sale, determine the amount of credit that should be extended and the terms, and then pay the business up to 90% of the invoice within one day.
This type of financing is ideal because it’s completely based on the customer’s credit situation, not the business. With the ability to extend net terms, orders increase while the business utilizes the benefits of prompt payment and access to working capital. One company providing these services is Resolve.
If you’re a business that offers net terms to customers, you may be interested in the credit check service that Resolve offers. Using only a business's name and address, Resolve’s credit risk experts give insights that you won’t get from a credit bureau report. The Resolve service provides a report that’s personalized and evaluated by their credit experts. Armed with information about what credit limit to offer, and which net terms to set out, merchants are able to attract new customers and close higher sales. And, the process protects customers from receiving too many hard checks on their credit.
Resolve also provides businesses with a payment portal directly linked to their business so customers can easily see their current available credit and make payments via their preferred payment method.
Small business owners can feel a lot of pressure when cash flow or accessing credit is challenging. And there are predatory lenders who will try to take advantage of businesses. There are a few simple things you can do to protect your business.
One of the best ways to narrow down the field of lenders is to check their eligibility requirements. If you don’t meet the requirements, you don’t need to go any further. Most lenders will at least list their requirements, including minimum credit score, minimum years in business, and minimum business annual revenue.
Next, watch for any lender who has high interest rates when compared to other lenders. Another red flag is too many fees. If the loan fees are more than 5% of your loan amount, keep looking. For example, a loan for $50,000 should not have fees in excess of $2,500. (And when those fees are added into your loan, you end up paying much more when the interest is charged.)
All lenders should inform you of the annual percentage rate and give you the full payment schedule and repayment terms in advance of signing any documents. And speaking of signing documents, stay away from any lender who wants you to leave a signature field blank or asks you to give inaccurate information on your application.
While there may be lenders that offer no credit check loans, it's important to carefully review all the fine print, as they may include challenging terms that aren't usually found in traditional business loans. You can conduct a better business bureau search into any lender to see if there are any complaints against them. Look at online reviews using platforms like Google and Trustpilot, and pay attention to those that are current (within the past year or so) and offer specific complaints or compliments.
If you’re still not sure about a lender or loan application, ask an expert for their review. People like financial planners, accountants, and attorneys can review a loan agreement and make sure the terms and amounts are reasonable. Even if this costs you money, it’s worth it to protect your business and your personal finances.
If you’re able to wait to apply for a small business loan, there are some things you can do to improve your chances of getting loan approval. The first may seem counterintuitive because it involves your personal credit. While small business lenders may not require information about a borrower's personal credit, showing that you have a good personal credit score and credit history may still be an advantage. If you want to offer a personal guarantee against the loan, you'll need to have good personal credit.
As far as your business goes, building your business score and improving your revenue are the best ways to prepare for loan applications and to increase your loan options. Of course, the tricky part is that many businesses that need a loan are struggling with revenue and a poor credit score! But every step you take to improve your financial situation is a good thing.
This may be a good place to consider companies like Resolve that offer immediate cash flow and net terms management solutions, regardless of your business’ current situation. With cash in hand, you’re better able to meet payroll, negotiate with suppliers, and expand your business.
Another action is to create a thorough business plan. Some lenders (especially those offering start-up loans) require a business plan as part of the application process. Having one gives you a blueprint for building a strong business while also providing lenders with confidence in your business.
Finally, consider getting reference letters from any vendors or creditors that you’ve provided on-time, regular payments. This is another way to show your financial reliability.
A simple search for business loans can reveal an overwhelming amount of information. One good place to start is to be clear about what your business needs. Is it financing for upgrading your equipment? Then an equipment loan may be the best solution?
Do you need a short-term loan that will carry your business into a busy season? That will eliminate searchers for business credit cards or commercial mortgages. And what if your cash flow challenges are directly tied to customers who are not paying within the first few weeks because of net terms? Then invoice financing or digital net terms may be a good option.
Once you know what you need (and why), you can narrow down your search options. Some lenders are known for serving businesses with bad credit. Others may have better interest rates, or payment terms that suit your business cycle.
Alternative lenders are more likely to offer fast approval but may charge higher interest rates. Conventional lenders, like traditional banks, may have a much more extensive application process but offer better rates. Ideally, the right funding solution for your business will allow you to meet your financial obligations while growing your business and improving your bottom line—and your credit score!